Several people sent me an editorial by The Economist, which seemed to endorse NGDP targeting:
Our suggestion is that the bank, backed by the chancellor, George Osborne, should make clear that it will not tighten policy until nominal GDP, currently £1.5 trillion, gets to a level that is at least 10% higher than today.
Let’s be clear about one thing; this isn’t really NGDP targeting, level targeting or otherwise. You need a rate of change, not just a number. And it’s also unclear how it would work. But I can think of all sorts of ways it could fail:
1. Suppose it took 10 years for NGDP to grow 10%—everyone who worries about liquidity traps would say that NGDP targeting has failed.
2. Suppose it took one year for NGDP to grow 10%, and inflation was 7%. People who warned that the policy was inflationary would be vindicated.
3. Suppose the British economy recovered at exactly the same rate it would grow without NGDP targeting. Then the policy would be seen as ineffective.
If the British government plans to switch to NGDP targeting, then they need to stick with it. Otherwise we’ll be in the worst of both worlds—-ineffective at controlling NGDP growth, and confusing to the markets.
PS. Yesterday I gave a talk at the Council on Foreign Relations in NYC. They sure have a nice boardroom! I also had the opportunity to meet Michael Woodford for the first time, and had a nice chat with him.
PPS. A couple days ago I did a post suggesting that BEA data implies NGDP growth was probably about 4% in Q4, not the 0.5% initially reported. Yesterday the government announced that job growth averaged nearly 200,000/month in Q4 (a strong quarter.) I think it’s pretty safe to say that NGDP growth was not 0.5%. Next month we’ll get the NGDI estimate, which is (ironically) a more accurate measure of NGDP than NGDP itself.
PPPS. Svetozar Pejovich tells me that there is interest in market monetarism in Serbia. If there are any Serbian speakers out there, I’d be curious as to what they have to say.